Section 21 Notice is Procedural (Limitation) and Does Not Confine Arbitral Jurisdiction; Wide Arbitration Clauses Permit Additional Claims/Counterclaims

Case: M/S.BHAGHEERATHA ENGINEERING LTD v. STATE OF KERALA

Citation: 2026 INSC 4 | Court: Supreme Court of India | Date: 05-01-2026

Coram: K.V. Viswanathan, J.; J.B. Pardiwala, J.

1. Introduction

The dispute arose out of four Road Maintenance Contracts awarded by the State of Kerala under the Kerala State Transport Project (KSTP). The contracts incorporated an “escalatory” dispute mechanism: Engineer → Adjudicator → Arbitration (GCC Clauses 24–25; Special Conditions Clause 4).

Parties and Disputes

Appellant (Contractor): M/s Bhagheeratha Engineering Ltd.
Respondent (Employer/State): State of Kerala

The Contractor referred four issues to the Adjudicator (15.04.2004), including price adjustment, escalation during extended periods, and interest for delayed payments. The Adjudicator (14.08.2004) decided partly for each side: in favour of the Contractor on disputes 1 and 3; against it on disputes 2 and 4.

Core Legal Issues Before the Supreme Court

Scope of arbitration: Whether the Arbitral Tribunal was constituted to adjudicate only “dispute no. (1)” (as the High Court held) or all four disputes.
Section 21, Arbitration and Conciliation Act, 1996: Whether the Contractor’s failure to issue a separate Section 21 notice for disputes 2–4 barred it from pursuing those claims in arbitration.

2. Summary of the Judgment

The Supreme Court allowed the appeal, set aside the Kerala High Court’s judgment, and upheld the arbitral award dated 29.06.2006 in its entirety. It held that:

The High Court erred in treating the arbitration as confined to dispute no. 1.
Non-issuance of a Section 21 notice by the Contractor for disputes 2–4 was not fatal.
Section 21 is primarily concerned with commencement of arbitration for limitation purposes and is procedural rather than jurisdictional.
Given the parties’ conduct (including the State’s attempt to declare the entire adjudicator decision “null and void”), the disputes were “thrown at large” before the tribunal; the State could not rely on contractual procedural rigours to narrow jurisdiction.

3. Analysis

3.1 Precedents Cited (and How They Shaped the Outcome)

(A) M.K. Shah Engineers & Contractors v. State of M.P. (1999) 2 SCC 594

This authority anchored the Court’s “conduct/waiver” analysis in the context of multi-tier contractual preconditions to arbitration. The Supreme Court invoked M.K. Shah Engineers & Contractors v. State of M.P. for two inter-linked propositions:

No party can take advantage of its own wrong: Where a party’s conduct frustrates contractual preconditions, it cannot later invoke those very preconditions to defeat arbitration.
Procedural prerequisites are waivable: Steps preceding arbitration, “though essential,” may be waived by conduct; a party disabling compliance is deemed to have waived them.

Applying this, the Court noted repeated departures from contractual timelines by the State (and even by the adjudicator), followed by the State’s insistence that payments would be withheld pending arbitration—conduct inconsistent with treating the adjudicator’s decision as final/binding.

(B) ASF Buildtech Private Limited vs. Shapoorji Pallonji & Company Private Limited (2025) 9 SCC 76

This case supplied the modern doctrinal framing: Section 21 is procedural and aimed at fixing the commencement date for limitation, not defining the tribunal’s jurisdiction. The Court reproduced and relied upon the holding that the term “particular dispute” in Section 21 does not confine the tribunal to only those disputes named in the invocation notice; jurisdiction flows from the arbitration agreement, not the notice.

Practical consequence highlighted: disputes first raised later may attract a different limitation reckoning date, but they are not barred solely for want of inclusion in the Section 21 notice.

(C) Adavya Projects Private Limited v. Vishal Structurals Private Limited and others (2025) 9 SCC 686

The Court treated this decision as reaffirming the same principle, expressly stating that non-inclusion of disputes in a Section 21 notice does not preclude raising them before the tribunal if covered by the arbitration agreement—only limitation computation may differ. The Court also relied on the proposition that even a respondent may raise counterclaims without issuing a separate Section 21 notice, so long as they fall within the arbitration clause.

(D) State Of Goa v. Praveen Enterprises . Enterprises (2012) 12 SCC 581

The respondent-State invoked paragraph 41(c) of State Of Goa v. Praveen Enterprises . Enterprises to argue “specific reference” confined jurisdiction. The Supreme Court rejected that reliance and instead applied the broader propositions in State Of Goa v. Praveen Enterprises . Enterprises:

Under wide “all disputes” clauses, appointment of the tribunal is an implied reference; the tribunal is not limited to a pre-drawn dispute list.
Claimants may add claims (including by amendment) and respondents may raise counterclaims, unless the arbitration agreement expressly restricts jurisdiction to specifically referred disputes.

On facts, the arbitration clause was widely worded (“any matter arising out of or connected with”), and the parties’ conduct demonstrated that all four disputes were in play.

(E) Indian Oil Corporation Ltd. v. Amritsar Gas Service and Others (1991) 1 SCC 533

The Court used this decision to reinforce that once a reference is made of “all disputes,” counterclaims (and by parity, associated claims) can arise after reference and must not be shut out on technical sequencing grounds. Though the 1991 case arose in a different procedural context, it supported the broader idea that arbitration should adjudicate the full dispute set where the reference/terms encompass it.

(F) Iron & Steel Co. Ltd. v. Tiwari Road Lines (2007) 5 SCC 703 and MSK Projects India (JV) Limited v. State of Rajasthan and Another (2011) 10 SCC 573

The Court held these were inapplicable because:

there was no breach of procedure in constituting the tribunal on the facts as analysed; and
the tribunal had not travelled beyond scope given the wide clause and the parties’ conduct reopening the four disputes.

3.2 Legal Reasoning

(I) The High Court’s “Dispute No. 1 only” view was legally and factually untenable

The Supreme Court rejected the High Court’s foundational premise that the tribunal was constituted only for dispute no. 1. Although the State’s letter dated 01.10.2004 asserted an intent to arbitrate dispute no. 1, subsequent events expanded the controversy:

The State withheld payments across the board, stating payments would be “subject to Arbitrations decision.”
The State asserted that even the question of delay in reference could be taken to arbitration.
Crucially, before the tribunal the State sought to declare the adjudicator’s decision in entirety “null and void” for alleged breach of Clause 24.1 (delay in approaching adjudicator), thereby itself reopening all four disputes.

This conduct undercut the State’s attempt to ring-fence arbitration to one issue.

(II) Contractual “escalatory” steps and timelines: waived/neutralised by conduct

The Court highlighted that the parties (and adjudicator) did not follow the contractual drill “in its true letter and spirit”:

The adjudicator delivered the decision far beyond the Clause 25.1 period.
The State initiated arbitration steps long after the Clause 25.2 period, while simultaneously insisting the matter can still go to arbitration.
The State raised a “null and void” attack on the adjudication itself, inconsistent with treating adjudication as final/binding.

On these facts, the Court applied the principle (drawn from M.K. Shah Engineers & Contractors v. State of M.P.) that a party cannot frustrate or disregard procedural preconditions and then rely on them to defeat arbitration.

(III) Section 21: procedural, not jurisdictional; its principal function is limitation

The Supreme Court expressly held that Section 21’s object is to determine commencement for limitation. It clarified that:

There is no mandatory prerequisite that a separate Section 21 notice must be issued for every claim to be maintainable in arbitration.
Failure to issue a Section 21 notice is not “fatal” if disputes are otherwise arbitrable and valid.
The operational impact is typically on limitation computation for claims first raised later.

This reasoning is aligned with the Court’s quotation from ASF Buildtech Private Limited vs. Shapoorji Pallonji & Company Private Limited and reaffirmed via Adavya Projects Private Limited v. Vishal Structurals Private Limited and others.

(IV) Wide arbitration clauses allow additional claims/counterclaims; “claimant” is procedural nomenclature

The Court emphasised that once the tribunal is constituted, the arbitration proceeds through pleadings under Section 23: statements of claim/defence and counterclaims (aided by Section 2(9) and Section 23(2A)). It rejected the respondent’s contention that only the party issuing a Section 21 notice can be a “claimant,” explaining that “claimant” is essentially the party that first files the statement of claim (and the respondent can counterclaim).

Importantly, the Court treated the arbitration clause (“any matter arising out of or connected with”) as expansive and therefore incompatible with a restrictive “only what was noticed” approach, unless the contract expressly imposes such restriction.

3.3 Impact

(A) Recalibration of Section 21 objections in Section 34/37 challenges

The judgment strengthens the trend that Section 21 is not a jurisdictional gatekeeping device. Parties will find it harder to set aside awards solely by arguing that certain claims/counterclaims were not preceded by a “separate” Section 21 notice. The likely battleground shifts to:

limitation for belatedly introduced claims; and
contractual restriction (if any) explicitly limiting arbitration to “specifically referred” disputes.

(B) Discouraging opportunistic reliance on escalatory clauses after conduct-based waiver

The Court’s reliance on conduct-based waiver prevents employers (and contractors) from:

ignoring/misapplying contractual time-lines and procedures, yet later invoking them as jurisdictional bars; or
reopening adjudication outcomes in arbitration while simultaneously arguing arbitration is limited to a single issue.

(C) Drafting and administration consequences for multi-tier dispute mechanisms

For contracts with Engineer/Adjudicator/Arbitration structures:

If parties truly intend arbitration to be confined only to “specifically referred” items, the arbitration clause must say so expressly (consistent with the logic of State Of Goa v. Praveen Enterprises . Enterprises).
Contract administration should be consistent: withholding payments “subject to arbitration” and seeking to nullify adjudication can broaden the dispute universe and support a finding of waiver.

4. Complex Concepts Simplified

4.1 “Section 21 Notice” (Commencement of arbitral proceedings)

Section 21 fixes the date arbitration is deemed to commence when a request to refer disputes is received by the other party—primarily relevant to limitation. This judgment clarifies it is not a jurisdictional lock: claims can be raised in pleadings under Section 23 even if not enumerated in the initial notice, provided they fall within the arbitration agreement.

4.2 “Escalatory clauses” (Engineer → Adjudicator → Arbitration)

These clauses prescribe steps before arbitration. They can be important, but they may be waived by conduct. If a party itself disregards the steps or timelines, or behaves in a way inconsistent with insisting on strict compliance, courts may prevent it from using the clause as a later technical bar.

4.3 “Scope of reference” vs “Scope of arbitration agreement”

Scope of arbitration agreement: What the clause says can be arbitrated (often “all disputes arising out of or in connection with”).
Scope of reference: In some contracts, parties restrict arbitration to “specifically referred” disputes only.

The Court applied the principle that unless the contract clearly restricts arbitration to specifically referred disputes, a wide arbitration clause allows the tribunal to decide all disputes within the clause, including counterclaims.

5. Conclusion

The Supreme Court’s decision in M/S.BHAGHEERATHA ENGINEERING LTD v. STATE OF KERALA clarifies and strengthens three important propositions:

Section 21 is procedural: its primary role is to determine commencement for limitation; non-issuance is not, by itself, fatal to maintainability of claims within the arbitration agreement.
Wide arbitration clauses are genuinely wide: unless expressly restricted, they allow additional claims/counterclaims beyond those mentioned at invocation.
Conduct matters in multi-tier clauses: a party that reopens disputes, ignores timelines, or frustrates preconditions cannot later weaponize those very procedural steps to narrow or defeat arbitral jurisdiction.

By restoring the arbitral award in full, the Court signals a pro-arbitration stance that prioritises substance over technical objections—while leaving limitation as the appropriate doctrinal tool to police belated claims.